Oleg Chanchikov is CEO of Capy, a company providing access to embedded finance services focusing on the MarTech industry.
Embedded finance is now part of everyday life, whether you’re ordering an Uber, using Tesla’s embedded insurance functionality or shopping directly on Instagram.
There is huge growth potential for apps built around this framework. If users no longer need to leave an app to make payments, they are more likely to stay engaged, so I believe we’re likely to see faster growth for the companies adopting it. But from my professional experience providing embedded finance services to the marketing technology space, I can’t help but think about the other side of the story: how financial institutions can support this shift and the challenges they might face.
Legacy Systems And Frameworks Constraints
Many financial institutions struggle to adapt to embedded finance solutions. A report from IBM said, “Insufficient modularity of core banking systems (53%), inadequate API standards (52%), and lack of funding commitment for long-term strategies (40%) are the top constraints holding banks back” in their embedded finance strategies.
I’ve found traditional banks often operate within rigid, risk-averse business frameworks that prioritize stability over innovation. Even if top management feels they should invest in such innovations, there’s a list of steps to take before any investment can occur. It’s not a matter of convincing one person or even a group of people but rather adapting to the lengthy processes built to identify and prevent high-risk spending.
For financial institutions, even minor system adjustments demand significant resource investment, which may not yield returns. In enterprises, each change must undergo a series of steps, such as market analysis, cost estimation, detailed feature mockups and profit forecasting. In startups or startup-like companies, many of these steps can be bypassed, which significantly speeds up the process.
While banks often wait to see how the market responds before embracing innovation, the rapidly evolving FinTech landscape could leave them playing catch-up, requiring further adjustments. Even when financial institutions decide to implement the necessary changes, they might still need more internal capacity or agility to deliver on time, which can further delay progress.
But we cannot forget that financial institutions’ role is indispensable to the growth of embedded finance. Without their involvement, embedded finance solutions would face significant scaling limitations. To sustain the current pace of innovation, it needs capital acquired by financial institutions, which means the only way forward is for banks and embedded finance players to work together.
Unknown ROI
Financial institutions, in my experience, typically prefer projects with guaranteed returns. For banks to justify technology adjustments, there needs to be a clear reason, ideally secured by contracts. On the other hand, apart from technical limitations, many banks don’t have a dedicated team to promote and develop embedded finance solutions. They prefer to focus on current revenue streams. While improving existing processes feels safer and involves lower risk, the returns are often smaller. This risk-averse approach is not aligned with a willingness to explore uncharted territory required by embedded finance adoption.
Cross-department collaboration can turn into another obstacle. Successfully adopting embedded finance requires forming teams with both deep technical expertise and an understanding of market dynamics. This might mean merging teams that have never worked together, each with its own workflows and set of key performance indicators, which may not align. Moreover, banks might need to invest in external experts who understand specific non-financial industries.
Underestimating Industry Applications
I’ve also found there is a common misconception among banks that embedded finance is only suitable for startups or small-scale operations, but this limited perspective can restrict financial institutions from scaling embedded finance solutions to larger enterprises or industries that could benefit from such innovations, such as technology, education or real estate. Even though embedded finance is growing rapidly—it’s expected to become a $570.9 billion niche by 2033—it still hasn’t reached the maximum of its potential.
To succeed, financial institutions can collaborate with unicorns and other large companies that retain a startup mindset. While engaging with these companies is often seen as challenging and unfamiliar territory, I believe this is precisely where the growth potential lies.
The Path Forward
To overcome challenges to adoption, banks must embrace a more agile approach. They can invest in internal and external resources, and, more importantly, they need to step out of their comfort zones. And if their processes are too strict, they can explore external embedded finance partners to help.
On the other side of the exchange, non-financial institutions face the challenge of effectively communicating their value to external audiences. While they may not control the volatility of the market, they can highlight key metrics such as revenue growth, market influence or customer base size to establish credibility. A larger market share or proven market impact can increase their appeal as partners to banks and other financial institutions.
Proactive communication of their needs is equally critical. Clearly articulating goals and expectations can pave the way for collaboration. This challenge also extends to embedded finance providers, who must prioritize market education to bridge the gap.
Without a shared understanding and alignment among key stakeholders, achieving successful integration will remain elusive.
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